UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
-------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19301
COMMUNICATION INTELLIGENCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2790442
------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 Shoreline Drive, Suite 500, Redwood Shores, CA 94065-1413
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 802-7888
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Number of shares outstanding of the issuer's Common Stock, as of August 6, 2001:
90,721,024.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
-------------------- --------
Condensed Consolidated Balance Sheets at June 30, 2002 (unaudited) and
December 31, 2001...........................................................3
Condensed Consolidated Statements of Operations for the Three
and Six-Month Periods Ended June 30, 2002 and 2001 (unaudited)..............4
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Three and Six-Month Periods Ended June 30, 2002
and 2001 (unaudited)........................................................5
Condensed Consolidated Statements of Cash Flows for the Three and
Six-Month Periods Ended June 30, 2002 and 2001 (unaudited)..................6
Notes to Unaudited Condensed Consolidated Financial Statements..............7
Item 2. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations..............................................11
---------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........16
----------------------------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................16
-----------------
Item 2. Change in Securities...............................................17
--------------------
Item 3. Defaults Upon Senior Securities....................................17
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders................17
---------------------------------------------------
Item 5. Other Information..................................................18
-----------------
..Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits................................................18
(b) Reports on Form 8-K.....................................18
Signatures..................................................... ...........19
-2-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands)
June 30, December 31,
2002 2001
-------------- -------------
Unaudited
Assets
Current assets:
Cash and cash equivalents.......................... $ 1,840 $ 2,588
Accounts receivable, net...................... 1,159 1,043
Inventories................................... 152 129
Prepaid expenses and other current assets..... 135 139
---------- -----------
Total current assets...................... 3,286 3,899
Property and equipment, net........................ 128 161
Capitalized software costs......................... 19 26
Patents and trademarks............................. 5,610 5,799
Other assets....................................... 108 187
---------- -----------
Total assets................................... $ 9,151 $ 10,072
========== ===========
Liabilities and Stockholders' equity
Current liabilities:
Short-term debt............................... $ - $ 181
Accounts payable.............................. 285 206
Accrued compensation............................... 289 208
Other accrued liabilities..................... 204 196
Deferred revenue.............................. 112 88
Capital Lease Obligations..................... 1 3
---------- -----------
Total current liabilities................. 891 882
Notes payable - noncurrent......................... 3,000 3,000
Minority interest.................................. 131 130
Commitments
Stockholders' equity:
Common stock.................................. 914 909
Additional paid-in capital.................... 82,026 81,605
Accumulated deficit........................... (77,617) (76,258)
Cumulative translation adjustment............. (194) (196)
----------- ------------
Total stockholders' equity................... 5,129 6,060
----------- ------------
Total liabilities and stockholders' equity... $ 9,151 $ 10,072
=========== ============
See accompanying notes.
-3-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Operations
Unaudited
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
-------- ------- ------- ------
Revenues:
Online................................. $ 80 $ 307 $ 204 $ 635
Corporate.............................. 708 1,224 1,406 1,767
Nonrecurring maintenance fees (net)-
M10 (previously PenOp Inc.) - - - 352
China .............................. 323 372 658 767
------- ------- ------- ------
Total revenues..................... 1,111 1,903 2,268 3,521
Operating costs and expenses:
Cost of sales:
Online............................. 22 306 185 575
Corporate.......................... 76 157 133 232
China ............................. 205 239 426 517
Research and development.............. 366 494 778 971
Sales and marketing ................. 427 573 814 1,134
General and administrative .......... 639 736 1,179 1,379
------- ------- ------- ------
Total operating costs and expenses 1,735 2,505 3,515 4,808
------- ------- ------- ------
Loss from operations ................... (624) (602) (1,247) (1,287)
Interest and other income
(expense), net ....................... 4 9 (9) 14
Interest expense ....................... (50) (98) (102) (159)
Minority interest ...................... (1) (2) (1) (2)
-------- ------- ------- ------
Net loss ...................... (671) (693) (1,359) (1,434)
======== ======= ======= =======
Basic and diluted loss per common share $ (0.01) $ (0.01) $ (0.01) $ 0.02)
======= ======= ======= =======
Weighted average common
shares outstanding ............... 91,278 90,542 91,113 90,384
======= ====== ====== ======
See accompanying notes.
-4-
Communication Intelligence Corporation
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Unaudited
(In thousands, except per share amounts)
Accumulated
Additional Other
Common Paid-In Accumulated Comprehensive
Stock Capital Deficit Gain (Loss) Total
Balances as of
December 31, 2001.. $ 909 $ 81,605 $(76,258) $ (196) $ 6,060
-------------------------------------------------
Exercise of options for
148 sharesof Common Stock..... 1 109 - - 110
Foreign currency translation
adjustment................... - - - 3 3
Net loss....................... - - (688) - (688)
-------------------------------------------------
Balances as of March 31, 2002..$ 910 $ 81,714 $(76,946) $ (193) $ 5,485
-------------------------------------------------
Exercise of options for
420 sharesof Common Stock.... 4 312 - - 316
Foreign currency translation
adjustment.................. - - - (1) (1)
Net loss...................... - - (671) - (671)
-------------------------------------------------
Balances as of June 30, 2002.. $ 914 $ 82,026 $(77,617) $ (194) $ 5,129
=================================================
See accompanying notes.
-5-
Communication Intelligence Corporation
and Subsidiary
Condensed Consolidated Statements of Cash Flows
Unaudited
(In thousands)
Six Months Ended
June 30,
-------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net loss.......................................... $ (1,359) $ (1,434)
Adjustments to reconcile net loss to net cash
(used) in operating activities:
Depreciation.................................... 50 75
Patent amortization............................. 189 208
Loan discount amortization...................... - 74
Non-cash compensation........................... - 46
Disposal of fixed assets........................ 5 -
Changes in operating assets and liabilities:
Accounts receivable, net...................... (116) 205
Inventories................................. (23) 86
Prepaid expenses and other current assets... 4 26
Other assets................................ 79 (16)
Accounts payable............................ 79 (292)
Accrued compensation........................ 81 (2)
Other accrued liabilities................... 9 (99)
Deferred revenue............................ 24 69
---------- -----------
Net cash (used in) operating activities....... (978) (1,054)
---------- -----------
Cash flows from investing activity:
Acquisition of property and equipment............ (12) (50)
---------- -----------
Net cash used in investing activity............ (12) (50)
---------- -----------
Cash flows from financing activities:
Payments on short-term debt....................... (181) (1,620)
Proceeds from acquisition of short-term debt...... - 181
Proceeds from acquisition of long-term debt....... - 3,000
Proceeds from exercise of stock options
and warrants...................................... 426 816
Principal payments on capital lease obligations... (3) (4)
----------- -----------
Net cash provided by financing activities..... 242 2,373
----------- -----------
Effect of exchange rate changes on cash.............. - -
----------- -----------
Net increase (decrease) in cash and cash equivalents. (748) 1,269
Cash and cash equivalents at beginning of period..... 2,588 2,349
----------- -----------
Cash and cash equivalents at end of period.......... $ 1,840 $ 3,618
=========== ===========
See accompanying notes.
-6-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
1. Interim financial statements
----------------------------
The accompanying unaudited condensed consolidated financial statements of
Communication Intelligence Corporation and its subsidiary (the "Company" or
"CIC") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, the financial statements included in this quarterly
report reflect all adjustments (consisting only of normal recurring adjustments)
which the Company considers necessary for a fair presentation of its financial
position at the dates presented and the Company's results of operations and cash
flows for the periods presented. The Company's interim results are not
necessarily indicative of the results to be expected for the entire year.
The Company develops and markets biometric electronic signature
verification and natural input software solutions aimed at emerging, fast
growth, large potential markets such as e-commerce, corporate security, mobile
voice/Internet devices including smartphones/communicators, PDAs, webpads and
the Palm OS aftermarket.
The Company's core software technologies include multilingual handwriting
recognition systems (Jot(R)) and the Handwriter Recognition System, referred to
as HRS(TM), electronic signature, biometric signature verification,
cryptography, electronic ink capture tools (InkTools(R)), Sign-it(R), iSign(TM)
and Sign-On(TM), and operating systems extensions that enable pen input
(PenX(TM)). Other consumer and original equipment manufacturer ("OEM") products
include electronic notetaking (QuickNotes(TM) and InkSnap(TM)) and predictive
text input, (WordComplete(R)). CIC's products are designed to increase the ease
of use, functionality and security of electronic devices with a primary focus on
wireless internet and information devices such as smartphones, electronic
organizers ("PDA's") and portable web browsers.
The Company offers a wide range of multi-platform software products that
enable or enhance pen-based computing. The Company's core technologies are
classified into two broad categories: "natural input technologies" and
"transaction and communication enabling technologies". Natural input
technologies are designed to allow users to interact with a computer or handheld
device by using an electronic pen or "stylus" as the primary input device or in
conjunction with a keyboard. CIC's natural input offerings include multilingual
handwriting recognition systems, software keyboards, predictive text entry, and
electronic ink capture technologies. Many small handheld devices such as
electronic organizers, pagers and smart cellular phones do not have a keyboard.
For such devices, handwriting recognition and software keyboards offer viable
solutions for performing text entry and editing. CIC's predictive text entry
technology simplifies data entry even further by reducing the number of actual
letters required to be entered. The Company's ink capture technologies
facilitate the capture of electronic ink for notetaking, drawings or short
handwritten messages. The Company's transaction and communication enabling
technologies are designed to provide a cost-effective means for securing
electronic transactions, providing network and device access control, and
enabling workflow automation of traditional paper form processing. CIC believes
that these technologies offer more efficient methods for conducting electronic
transactions and provide more functional user authentication and heightened data
security. The Company's transaction and communication enabling technologies have
been fundamental in its development of software for signature verification, data
security, and data compression.
For the six months ended June 30, 2002, the Company's cash and cash
equivalents decreased by $748 from $2,588 at the beginning of the period to
$1,840. The decrease was due primarily to cash used in operating activities of
$978, cash used in investing activities of $12 offset by $242 provided by
financing activities. The $242 provided by financing activities consists of $426
in proceeds from the exercise of stock options by the Company's employees and
former chairman, reduced by the repayment of the note by the Joint Venture of
$181 and by payments of capital lease obligations of $3. As of June 30, 2002,
the Company's principal source of funds was its cash and cash equivalents
aggregating $1,840. The Company anticipates that it will have adequate capital
to fund its planned operations for the near future. However, there can be no
assurance that the Company will have adequate capital resources to fund planned
-7-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
operations or that any additional funds will be available to the Company when
needed, or if available, will be available on favorable terms or in amounts
required by the Company. If the Company is unable to obtain adequate capital
resources to fund operations, it may be required to delay, scale back or
eliminate some or all of its operations, which may have a material adverse
effect on the Company's business, results of operations and prospects.
The financial information contained herein should be read in conjunction
with the Company's audited financial statements included in its Annual Report on
Form 10-K for the year ended December 31, 2001.
2. Cash and cash equivalents
-------------------------
The Company considers all highly liquid investments with original
maturities of up to 90 days to be cash equivalents.
Cash and cash equivalents consist of the following:
June 30, December 31,
2002 2001
--------------------- -- -------------------
Cash in bank $ 1,114 $ 1,621
Commercial paper 26 26
Money market 700 941
--------------------- -------------------
$ 1,840 $ 2,588
===================== ===================
3. Inventories
-----------
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. At June 30, 2002,
inventories consisted primarily of finished goods.
4. Short-term debt
---------------
On August 23, 2001, the Company's 90% owned Joint Venture borrowed the
aggregate equivalent of $181, denominated in Chinese currency, from a
Chinese bank. The loan bears interest at 5.37% per annum and is due August
23, 2002. The borrowing did not require the Joint Venture to deposit a
compensating balance. In February 2002, the Joint venture repaid $121 and
in August 2002, paid the remaining equivalent of $60 denominated in Chinese
currency.
5. Related Party Transactions:
--------------------------
A. Long-term debt related party
------------------------------
On June 19, 2001, the Company consummated a three-year $3 million
financing (the "Loan") with a charitable remainder annuity trust of which a
former director and officer of the Company is a trustee (the "Trust"). The
proceeds of the Loan were used to refinance $1,500 of indebtedness
outstanding to the Trust pursuant to a loan made by the Trust to the
Company in October 1999 and for working capital purposes.
The Loan bears interest at the rate of 2% over the prime rate publicly
announced by Citibank N.A. from time to time, which was 6.75% per annum at
June 30, 2002, and is due June 18, 2004. The Loan may be pre-paid by the
Company in whole or in part at any time without penalty, subject to the
right of the Trust to convert the outstanding principal amount of the Loan
into shares of common stock. Pursuant to the terms of the Loan, the Trust
has the option, at any time prior to maturity, to convert all or any
portion of the outstanding principal amount of the Loan into shares of
common stock of the Company at a conversion price of $2.00 per share,
subject to adjustment upon the occurrence of certain events. If, prior to
maturity of the Loan, the Company consummates one or more financings
providing $5 million or more in gross proceeds, the Company is required to
-8-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
apply 50% of the proceeds in excess of $5 million to the then outstanding
principal amount of the Loan. The Loan is secured by a first priority
security interest in and lien on all of the Company's assets as now owned
or hereafter acquired by the Company.
In connection with the Loan, the Company entered into a registration
rights agreement with the Trust which obligates the Company to file a
registration statement with the Securities and Exchange Commission covering
the sale of the shares of the Company's common stock issuable upon
conversion of the Loan if it receives a demand by the holder of the Loan to
do so, and to use its reasonable best efforts to cause such registration
statement to become effective.
B. Transactions with PenOp
-----------------------
During the fourth quarter of 2000 the Company engaged in a transaction
with PenOp to provide nonrecurring maintenance services from pre-existing
PenOp contracts in the aggregate amount of $1.5 million, of which a net
amount of $877 was recorded as revenue during the quarter. At June 30, 2001
the Company recognized $325 of this contract revenue net of related
expenses of $48. The Company previously entered into a separate
transaction, to acquire the intellectual property rights from PenOp.
6. Revenue recognition
-------------------
Online Revenue - Revenue from retail product sales is recognized upon
sell through, while revenue from other product sales is recognized upon
shipment provided that no significant obligations remain and the collection
of the resulting receivable is probable. The Company provides for estimated
sales returns at the time of shipment.
Corporate Revenue - License and product revenues are recognized when
the software has been delivered and when all significant obligations have
been met in accordance with the American Institute of Certified Public
Accountants Statement of Position Number 97-2, "Software Revenue
Recognition." The Company also follows the interpretive guidance of SAB 101
issued by the Securities and Exchange Commission and EITF issue 00-21 of
the AICPA Emerging Issues Task Force. Royalty revenues are recognized as
products are licensed/sold by licensees. Development contracts revenue is
generated primarily from non-recurring engineering activities. Revenue is
recognized in accordance with the terms of the agreements, generally when
collection is probable and related costs have been incurred.
China Revenue - Revenue from system integration activities and product
sales are recognized upon shipment provided that no significant obligations
remain and the collection of the resulting receivable is probable.
7. Net loss per share
------------------
The Company calculates earnings per share under the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 requires the disclosure of both basic earnings per
share, which is based on the weighted average number of shares outstanding,
and diluted earnings per share, which is based on the weighted average
number of shares and dilutive potential shares outstanding. For the three
and six months ended June 30, 2002, and 2001 potential equivalent shares
excluded from the calculation of diluted earnings per share, as their
effect is not dilutive, include stock options of 6,682, and 7,195,
respectively, of equivalent shares and warrants of 470 equivalent shares at
June 30, 2001.
-9-
Communication Intelligence Corporation
and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except per share amounts)
FORM 10-Q
8. Comprehensive income
Total comprehensive income (loss) was as follows:
Six Months Ended June 30,
---------- ------ -------------
2002 2001
----------- -------------
Net loss $ (1,359) $ (1,434)
Other comprehensive income:
Cumulative translation adjustment 2 2
----------- -------------
Total comprehensive loss $ (1,357) $ (1,432)
=========== =============
9. Segment Information
-------------------
The Company's segment information under the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of An Enterprise and Related Information"
("SFAS 131"), is comprised of two segments - handwriting recognition
software and systems integration.
The accounting policies followed by the segments are the same as those
described in the "Summary of Significant Accounting Policies." Segment data
includes revenues, as well as allocated corporate-headquarters costs
charged to each of the operating segments.
The Company identifies reportable segments by classifying revenues
into two categories: handwriting recognition and system integration.
Handwriting recognition software is an aggregate of three revenue
categories. All handwriting recognition software is developed around the
Company's core technology. System integration represents the sale and
installation of third party computer equipment and systems that utilize the
Company's products. All sales above represent sales to external customers.
The table below presents information about reporting segments for the
periods indicated:
Six Months ended June 30,
2002 2001
----------------------------- ------------------------------
Handwriting Systems Handwriting Systems
Recognition Integration Total Recognition Integration Total
----------- ----------- ----- ---------- ------------- -----
Revenues $ 1,711 $ 557 $ 2,268 $ 2,912 $ 609 $ 3,521
Loss from Operations $(1,201) $ (46) $(1,247) $(1,236) $ (51) $ (1,287)
Significant change
in Total assets
from Year End $ - $ (35) $ (35) $ - $ - $ -
-10-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
-----------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with
the Company's unaudited condensed consolidated financial statements and notes
thereto included in Part I - Item 1 of this Quarterly Report on Form 10-Q and
"Management`s Discussion and Analysis of Financial Condition and Results of
Operations" set forth in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
On October 6, 2000, CIC Acquisition Corp., a wholly-owned subsidiary of the
Company ("Acquisition Corp."), acquired certain assets of PenOp Limited and its
subsidiary PenOp Inc. for 4.7 million shares of common stock of the Company
pursuant to an Asset Purchase Agreement, dated as of September 29, 2000, by and
among Acquisition Corp., PenOp Limited and PenOp Inc. At the closing of this
transaction, Mr. Philip Sassower, the Company's Chairman of the Board, and his
designees agreed to purchase from PenOp Limited and PenOp Inc., in a private
transaction, an aggregate of 1,713,728 shares of common stock received by PenOp
Limited and PenOp Inc. in connection with the Acquisition for $3,300.
Results of Operations
Revenues. For the three and six months ended June 30, 2002, total revenues
decreased $792 and $1,253, respectively, or 42% and 36%, respectively, to $1,111
and $2,268 from $1,903 and $3,521, respectively, for the comparable three and
six month periods ended June 30, 2002 as discussed below:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- -------- ---------- ----------
Revenues:
Online $ 80 $ 307 $ 204 $ 635
Corporate 708 1,224 1,406 1,767
Nonrecurring maintenance
fees (net) - M10
(previouslyPenOp) - - - 352
China 323 372 658 767
-------- ------- -------- --------
Total revenues $ 1,111 $ 1,903 $ 2,268 $ 3,521
======== ======== ======== ===========
Online revenues decreased $227 or 74% to $80 for the three months ended
June 30, 2002 as compared to $307 in the prior year period. This decrease was
primarily due to a decrease in available names used in the Company's direct mail
campaign compared to the same period last year. For the six months ended June
30, 2002, Online revenues decreased $431 or 68% to $204 from $635 in the same
six month period last year. This decrease is due to the same factors mentioned
above.
Corporate sales, which includes Enterprise and OEM revenues, decreased 42%
or $516 to $708 for the three months ended June 30, 2002 as compared to $1,224
in the prior year period. For the six months ended June 30, 2002 Corporate sales
decreased 20% or $361 to $1,406 from $1,767 compared to the six month period of
the prior year. Enterprise sales, included in Corporate sales, decreased for the
three months ended June 30, 2002, $280 or 38% to $463 as compared to $743 in the
prior year. The decrease in Enterprise sales was primarily due to a sale to a
major insurance company (Prudential Insurance Company of America) in the
comparable prior year period. For the six months ended June 30, 2002 Enterprise
sales increased 12% or $114 to $1,069 compared to $955 in the prior year period.
This increase was primarily due to the increase in the number of sales of the
Company's software signature products over the six months as compared to the
prior year period. OEM revenues, included in corporate sales, for the three
months ended June 30, 2002 decreased 49% or $236 to $245 from $481 in the prior
period. This decrease was due to a decrease in the amount of royalty and
-11-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
development contract revenues recognized from OEMs compared to the prior year.
OEM revenues for the six months ended June 30, 2002 decreased 58% or $475 to
$337 from $812 in the prior period. The decrease in OEM revenues for the six
months ended June 30, 2002 was due primarily to the same factors discussed for
the current three month period.
During the six months ended June 30, 2001, the Company recognized $352 in
nonrecurring maintenance fees net of expenses of $48. The Company engaged in a
transaction with PenOp to provide nonrecurring maintenance services from
pre-existing PenOp contracts in the aggregate amount of $1.5 million, of which
$877 was recorded (net) in the fourth quarter of 2000. The Company previously
entered into a separate transaction to acquire the intellectual property rights
from PenOp. No such nonrecurring maintenance service revenues were recorded
during the six months ended June 30, 2002.
China sales for the three months ended June 30, 2002 decreased $49 to $323
from $372 in the same prior year period. For the six months ended June 30, 2002
China revenues decreased 14% or $109 to $658 from $767 in the same prior year
period. This decrease was due to decreased overall sales activity in 2002
compared to the prior year period.
Cost of Sales. Total cost of sales decreased for the three and six months
ended June 30, 2002 $399 and $580, respectively, or 57% and 44%, respectively,
to $303 and $744, respectively compared to $702 and $1,324, respectively, in the
same prior year periods.
Online cost of sales for the three and six months ended June 30, 2002
decreased $284 and $390, respectively, or 93% and 68%, respectively, to $22 and
$185, respectively, compared to $306 and $575, respectively, in the same prior
year periods. This decrease was due to the elimination of direct mail and
associated costs brought about by the decreased number of names available during
the three and six months ended June 30, 2002.
Corporate sales costs for the three months ended June 30, 2002 decreased
$81 or 52% to $76 from $157 in the same prior year period. For the six months
ended June 30, 2002, corporate cost of sales decreased $99 or 42% to $133
compared to $232 in the same prior year period. Enterprise cost of sales
decreased $64 or 44% to $80 for the three months ended June 30, 2002 from $144
in the comparable prior year period. The decrease was due to a reduction in
third party hardware costs sold with the Company's corporate signature software
solution products, and amortization of capitalized software costs. For the six
months ended June 30, 2002, enterprise cost of sales increased $7 or 5% to $137
compared to $130 in the comparable prior year period. The increase was due to
sales requiring third party hardware devices. OEM and licensing costs for the
three and six month periods ended June 30, 2002 decreased $17 and $105,
respectively, or 130% and 103%, respectively, to $(4) and $(3), respectively,
from $13 and $102, respectively, in the prior year periods. The decrease was due
to a decrease in revenues and the associated technology import tax from the
Company's Japanese OEM customers.
China cost of sales for the three and six months ended June 30, 2002
decreased $34 and $91, respectively, or 14% and 18% to $205 and $426,
respectively, compared to $239 and $517, respectively, in the same prior year
periods. The decrease was due to a reduction in system integration sales which
require third party hardware and an increase in higher margin sales of the
Company's software products over the three and six month ended June 30, 2002
compared to the same prior year periods.
Gross Margin. Gross margin for the three and six months ended June 30, 2002
decreased $393 and $673, respectively, or 33% and 31%, respectively, to $808 and
$1,524, respectively, from $1,201 and $2,197, respectively, in the same prior
year periods.
Online gross margin for the three months ended June 30, 2002 increased $57
to $58 from a gross margin of $1 for same prior year period. This increase is
due to the elimination of direct mail and associated costs brought about by the
decreased number of names available during the three months ended June 30, 2002.
For the six month period ended June 30, 2002, Online gross margins decreased $41
to $19 from $60 for the six months ended June 30, 2002 compared to the prior
-12-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
year. The decrease was due to fewer new names available over the six month
period ended June 30, 2002 compared to the same six month period last year and
the direct mail costs incurred in the attempt to stimulate sales during the
first quarter of the current year. Online gross margins were 73% and 9%,
respectively, of sales for the three and six months ended June 30, 2002 compared
to less than 1% and 9%, respectively, in the same prior year periods.
Corporate sales gross margin for the three and six months ended June 30,
2002 decreased $435 and $262, respectively, or 41% and 17%, respectively, to
$632 and $1,273, respectively, compared to $1,067 and $1,535, respectively, in
the same prior year periods. This decrease was primarily due to the decrease in
Corporate sales. Corporate sales gross margin as a percentage of sales was 89%
and 91% for the three and six month periods ended June 30, 2002 compared to 87%
and 87% for the same three and six month periods of the prior year.
China sales gross margin for the three and six month periods ended June 30,
2002 decreased $15 and $18, respectively, or 11% and 7%, respectively, to $118
and $232, respectively, from $133 and $250, respectively, in the same prior year
periods. This increase was due to the increase in sales, and change in the sales
mix from system integration sales to software product sales. China gross margin
as a percentage of sales increased to 37% and 35% for the three and six months
ended June 30, 2001 compared to 36% and 33%, respectively, for the comparable
three and six month periods in the prior year periods.
Research and development expenses. Research and development expenses for
the three and six months ended June 30, 2002 decreased by $128 and $193,
respectively, to $366 and $778, respectively, as compared to $494 and $971,
respectively, in the comparable three and six month periods of the prior year.
The decrease was due primarily to the reduction of approximately $81 and $212,
respectively, in outside engineering costs associated with the assimilation of
the PenOp intellectual property into the Company's products. In addition,
payroll and related costs decreased approximately $23 and $65, respectively, for
the three and six months ended June 30, 2002, compared to the prior year. The
reduction in payroll and related expenses was due to actions taken in the fourth
quarter of last year to trim expenses in response to a weakening economy. Other
costs including facilities and shared engineering costs with the Joint Venture
decreased $1 for the three months ended June 30, 2002 compared to the prior year
and increased $44 over the six months ended June 30, 2002. The increase over the
six month period was due to increases in facility expenses. Expenses transferred
to cost of sales increased $23 for the three months ended June 30,2002 compared
to the prior year period. Expenses transferred to cost of sales for the six
months ended June 30 2002 decreased $40 compared to the prior year. These
fluctuations in expenses for the three and six month periods are due to the
changes in the number of revenue generating NRE projects being worked on during
a given period. The Company capitalized $20 in software development costs
associated with new products and enhancements during the six months ended June
30, 2001. The Company did not capitalize any new product software development
costs in the six month period ending June 30, 2002.
Sales and marketing expenses. Sales and marketing expenses for the three
and six months ended June 30, 2002 decreased $146 and $320, respectively, to
$427 and $814, respectively, as compared to $573 and $1,134, respectively, in
the comparable periods of the prior year. Professional services and advertising
expenses decreased $18 to $82 from $100 for the three month ended June 30, 2002
as compared with the same period last year. For the six month period ended June
30, 2002, professional services and advertising fees decreased $77 to $107 from
$184 as compared with the same period last year. This decrease was due primarily
to the reduction in the volume of resource guide advertisements included in the
box that accompany the hand held devices. Other costs, including salaries and
related expenses and travel and recruiting expenses, decreased $128 for the
three months ended June 30, 2001 compared to the same period in the prior year.
For the six months ended June 30, 2001 other costs, including salaries and
related expenses and travel and recruiting expenses decreased $243 as compared
to the same six month period last year. The reduction in other expenses was due
to actions taken in the fourth quarter of last year to trim expenses in response
to a weakening economy.
General and administrative expenses. General and administrative expenses
for the three and six months ended June 30, 2002 decreased $97 and $200 to $639
and $1,179, respectively, from $736 and $1,379, respectively, in the comparable
period of the prior year. Professional services decreased $103 and $179,
respectively, due to the reduction in legal fees and in financial service fees
paid
-13-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
to the former Chairman of the Company. Payroll and related costs increased
approximately $14 and $20 respectively, due to salary increases. Other costs,
including facilities and related costs, decreased $8 and $41, respectively, over
the comparable three and six month periods of the prior year. The decrease in
expenses discussed above were due primarily to a decrease in expenses as a
result of actions taken in the fourth quarter of last year to trim expenses in
response to a weakening economy.
Interest and other income (expense), net. Interest and other income
(expense), net for the three and six months ended June 30, 2002 decreased $5 and
$23, respectively, to income of $4 and an expense of $9, respectively, compared
to income of $9 and $14, respectively, in the comparable periods of the prior
year. Interest income from cash and cash equivalents decreased $9 and $25,
respectively, to $7 and $8 for the three and six months ended June 30, 2002,
compared to $16 and $33 in the same periods of the prior year. This decrease was
due to lower cash balances and declining interest rates during the three and six
month periods ended June 30, 2001 compared to the prior year. The interest
income was offset by $3 and $12, respectively, of credit card processing and
other fees compared to $7 and $21, respectively, in the same period of the prior
year related to Online sales.
Interest expense. Interest expense decreased $48 and $57, respectively, to
$50 and $102 for the three and six month periods ended June 30, 2002 compared to
$98 and $159, respectively, in the same prior year periods. The decrease in
interest expense was primarily due to the decrease in the loan discount
amortization of $51 and $68 for the three and six months ended June 30, 2002
compared to the prior year. This decrease was offset by an increase $3 and $11
for the three and six months ended June 30, 2002. The increase in interest
expense was due to an increase in long-term debt in June of 2001. The loan
discount amortization was fully expensed as of June 30, 2001 when the Company
refinanced $1,500 in long term debt.
Liquidity and Capital Resources
At June 30, 2002, cash and cash equivalents totaled $1,840 compared to cash
and cash equivalents of $2,588 at December 31, 2001. The decrease was due
primarily to cash used in operating activities of $978, cash used in investing
activities of $12. Cash provided by financing activities was $242, net. The $242
provided by financing activities consists primarily of proceeds of $426 from the
exercise of stock options by the Company's employees reduced by the repayment of
notes by the Joint Venture of $181 and by payments on capital lease obligations
of $3. Total current assets were $3,286 at June 30, 2002 compared to $3,899 at
December 31, 2001.
As of June 30, 2002, the Company's principal source of liquidity was its
cash and cash equivalents of $1,840. Although there can be no assurance of
continued sufficiency, the Company believes that its cash and cash equivalents
together with cash provided from projected cash inflows will be adequate to fund
planned operations for the near future. However, if the Company is unable to
generate adequate cash flows from sales, or if expenditures required to achieve
the Company's plans are greater than expected, the Company may need to obtain
additional funds or reduce discretionary spending. There can be no assurance
that additional funds will be available when needed, or if available, will be
available on favorable terms or in the amounts required by the Company. If
adequate funds are not available when needed, the Company may be required to
delay, scale back or eliminate some or all of its operations, which will have a
material adverse effect on the Company's business, results of operations and
prospects.
Current liabilities, which include deferred revenue, were $891 at June 30,
2002. Deferred revenue, totaling $112 at June 30, 2002, primarily reflects
advance payments for products and maintenance fees from the Company's licensees
which are generally recognized as revenue by the Company when all obligations
are met or over the term of the maintenance agreement.
The Company currently owns 90% of a joint venture with the Information
Industry Bureau of the Jiangsu Province, a provincial agency of the People's
Republic of China (the "Agency"). The Company's investment in the Joint Venture
is subject to risks of doing business abroad, including fluctuations in the
value of currencies, export duties, import controls and trade barriers
(including quotas), restrictions on the transfer of funds, longer payment
cycles, greater difficulty in accounts receivable collections, burdens of
complying with foreign laws and political and economic instability.
-14-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
On October 2, 2001 the Company entered a new five year lease for its
existing principal offices at 275 Shoreline Drive, Suite 500, Redwood Shores
California for approximately 9,634 square feet. The lease commenced November 1,
2001 with a first year lease costs of approximately $347,000. The cost of the
lease will increase approximately 3% per annum over the term of the lease which
expires October 31, 2006. In addition to the base rent the Company will pay a
percentage of the increase, if any, in operating cost incurred by the landlord
in such year over the operating expenses incurred by the landlord in the base
year. The Company believes the offices will be adequate for its needs over the
term of the lease.
On August 23, 2001, the Company's 90% owned Joint Venture borrowed the
aggregate equivalent of $181, denominated in Chinese currency, from a Chinese
bank. The loan bears interest at 5.37% per annum and is due August 23, 2002. The
borrowing did not require the Joint Venture to deposit a compensating balance.
In February 2002, the Joint Venture repaid $121 and in June 2002 repaid the
remaining balance of $60 denominated in Chinese currency.
On June 19, 2001, the Company consummated a three-year $3 million financing
(the "Loan") with a charitable remainder annuity trust of which a former
director and officer of the Company is a trustee (the "Trust"). The proceeds of
the Loan were used to refinance $1,500 of indebtedness outstanding to the Trust
pursuant to a loan made by the Trust to the Company in October 1999 and for
working capital purposes. The Loan bears interest at the rate of 2% over the
prime rate publicly announced by Citibank N. A. from time to time, which was
6.75% per annum at June 30, 2002, and is due June 18, 2004. The Loan may be
pre-paid by the Company in whole or in part at any time without penalty, subject
to the right of the Trust to convert the outstanding principal amount of the
Loan into shares of common stock. Pursuant to the terms of the Loan, the Trust
has the option, at any time prior to maturity, to convert all or any portion of
the outstanding principal amount of the Loan into shares of common stock of the
Company at a conversion price of $2.00 per share, subject to adjustment upon the
occurrence of certain events. If, prior to maturity of the Loan, the Company
consummates one or more financings providing $5 million or more in gross
proceeds, the Company is required to apply 50% of the proceeds in excess of $5
million to the then outstanding principal amount of the Loan. The Loan is
secured by a first priority security interest in and lien on all of the
Company's assets as now owned or hereafter acquired by the Company.
In connection with the Loan, the Company entered into a registration rights
agreement with the Trust which obligates the Company to file a registration
statement with the Securities and Exchange Commission covering the sale of the
shares of the Company's common stock issuable upon conversion of the Loan if it
receives a demand by the holder of the Loan to do so, and to use its reasonable
best efforts to cause such registration statement to become effective.
Forward Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q,
including without limitation, statements containing the words "believes",
"anticipates", "hopes", "intends", "expects", and other words of similar import,
constitute "forward looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements involve known and
unknown risks, uncertainties and other factors which may cause actual events to
differ materially from expectations. Such factors include the following:
o Technological, engineering, manufacturing, quality control or other
circumstances which could delay the sale or shipment of products;
o Economic, business, market and competitive conditions in the
software industry and technological innovations which could affect
the Company's business;
-15-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Forward Looking Statements (continued)
o The Company's inability to protect its trade secrets or other proprietary
rights, operate without infringing upon the proprietary rights of others and
prevent others from infringing on the proprietary rights of the Company; and
o General economic and business conditions and the availability of sufficient
financing.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, as a result of new information, future events or
otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company has an investment portfolio of fixed income securities that are
classified as cash equivalents. These securities, like all fixed income
instruments, are subject to interest rate risk and will fall in value if the
market interest rates increase. The Company attempts to limit this exposure by
investing primarily in short term securities. The Company has not entered into
any short-term security investments during the three months ended June 30, 2001.
Foreign Currency Risk
From time to time, the Company makes certain capital equipment or other
purchases denominated in foreign currencies. As a result, the Company's cash
flows and earnings are exposed to fluctuations in interest rates and foreign
currency exchange rates. The Company attempts to limit these exposures through
operational strategies and generally has not hedged currency exposures.
Future Results and Stock Price Risk
The Company's stock price may be subject to significant volatility. The
public stock markets have experienced significant volatility in stock prices in
recent years. The stock prices of technology companies have experienced
particularly high volatility, including, at times, severe price changes that are
unrelated or disproportionate to the operating performance of such companies.
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to, among other factors, quarter-to-quarter variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors, announcements of new strategic relationships
by the Company or its competitors, general conditions in the computer industry
or the global economy generally, or market volatility unrelated to the Company's
business and operating results.
Part II-Other Information..
Item 1. Legal Proceedings
The Company was named as a defendant in a suit brought in U.S. District
Court for the Southern District of New York, filed on August 5, 2002, case
number 02-CV-6197. The plaintiffs, Richard M. Ross and Jane Spaulder Ross,
brought claims for breach of contract, conversion, negligence and statutory
violations, alleging that the Company provided incorrect or false information to
their stock broker, thereby delaying the sale of plaintiffs' shares in the
Company and causing a loss in excess of $500,000. While the litigation is in an
early stage, based on the available information, we do not believe that the
action will ultimately have a material financial impact on the Company. We
believe that the claims are without merit, and we intend to vigorously defend
them.
In a separate arbitration proceeding the plaintiffs have brought similar
claims for relief against Charles Schwab & Co., Inc., their broker during the
period in question, based upon other legal theories.
-16-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Item 2. Change in Securities
During the three months ended June 30, 2002, the Company granted stock
options to employees and directors as follows:
------------------------------------------------------------------------------
Grant Number of Option Vesting Expiration
Grantees Date Options Price Period Date
------------------------------------------------------------------------------
3 Directors June 24, 2002 75,000 $0.66 Immediately June 24, 2009
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Quarterly over
1 Employees June 12, 2002 100,000 $0.75 three years June 12, 2009
2 Employees June 12, 2002 8,000 $0.75 Immediately June 12, 2009
------------------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on June 24, 2002. The
number of shares of common stock with voting rights as of the record date
represented at the meeting either in person or by proxy was 85,138 shares or 93%
of the eligible outstanding Common Stock of the Company. Three proposals were
voted upon by the stockholders. The proposals and the voting results follow:
Proposal 1
Each of the four persons listed below were elected as directors to serve
until the next Annual Meeting or until his successor is elected or appointed.
The number of votes for and withheld for each individual is listed next to his
name.
Broker
-----------------------------
Name For Withheld Non-votes Abstain
----------------- ----------- --------------- --------------- --------------
Guido DiGregorio 84,182 956 None None
Michael Farese 84,459 679 None None
Louis Panetta 84,459 679 None None
C. B. Sung 84,459 679 None None
Proposal 2
To ratify the appointment of Stonefield Josephson, Inc. as independent
accountants of the Company for the fiscal year ending December 31, 2002. The
number of votes for, against and abstaining on this proposal was as follows:
Broker
--------------------------
For Against Abstain Non-votes Abstain
--------- ----------- ----------- ------------- ----------
All Classes 84,515 488 135 None None
-17-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
Proposal 3
To ratify the amendment to the Company's 1999 Stock Option Plan increasing
the number of shares of the Company's common stock available for grants of stock
options under the plan. The number of votes for, against and abstaining on this
proposal was as follows:
Broker
------------------------
For Against Abstain Non-votes Abstain
-------- ---------- ----------- ------------- ----------
All Classes 80,588 4,228 321 None None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Certification of Chief Executive Officer and Chief Financial Officer
(b) Reports on Form 8-K
None
-18-
Communication Intelligence Corporation
and Subsidiary
(In thousands, except share and per share amounts)
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNICATION INTELLIGENCE CORPORATION
--------------------------------------------
Registrant
August 14, 2001 /s/ Francis V. Dane
- ----------------------- ---------------------------------------------
Date Francis V. Dane
(Principal Financial Officer and Officer Duly
Authorized to Sign on Behalf of the Registrant)
-19-